Chinese private-equity funds eye foreign assets

For most investors, including local ones, China is all about benefiting from the domestic growth story, but lately private-equity funds raised on the mainland have been looking to acquire foreign assets.

Law firm Jones Day, which is expanding its Asia-based alternative investment funds practice, sees this as a new and interesting trend in mainland China.

There are two broad approaches that these funds have been looking into, says partner Dennis Barsky. One involves using an offshore private-equity fund structure to acquire foreign assets and then exit by selling the assets to PRC buyers. The other involves a parallel structure, whereby a domestic PRC fund aligns itself with an offshore fund to co-invest in foreign assets.

The foreign assets that currently seem to have the most appeal are resource-related assets such as petroleum products. “The strategy is effectively an arbitrage on deal multiples,” he adds. “The fund makes money by acquiring relatively cheap assets and selling them back into China at higher multiples to companies that, while well capitalised, would not typically have the ability to make overseas acquisitions.”

Barsky says some of the funds involved are well-recognised names in the alternative investments arena, while others are large local enterprises that are not yet known internationally.

Meanwhile, funds lawyer Carolyn McNabb says Singapore is seeing an increase in hedge-fund start-up activity following clarification from the Monetary Authority of Singapore on the future regulation of the city state’s fund-management industry.

“There are also a number of talented portfolio managers in the incubation stages seeking to raise start-up capital from seed investors before launching their own hedge funds,” she adds.

“Although long/short investment strategies remain the dominant strategies adopted by Asian hedge fund managers,” says McNabb, “we are now seeing more hedge funds managers running special-situations [which invest in both liquid and illiquid investments], event-driven and volatility strategies.”

As for Hong Kong, some hedge funds that will be launching there later this year are likely to be quite large, raising $500 million to $750 million and upwards, she adds.

McNabb joined Jones Day last month in Singapore from rival firm Sidley Austin. Another new hire in August will bring Jones Day’s alternative investment funds practice up to five in the Lion City.

Joy Choynowska and Sean Murphy round out the Asia practice, which is fairly new, having started up when Barsky returned to the firm at the start of last year from hedge fund ClimateEdge Capital.

“Carolyn was our first major lateral hire for the alternative investment funds practice since my return to the firm,” he says. “We are proud that the practice has developed to the point that we could attract someone of her calibre.”